The following cash flows are expected:

- 10 yearly payments of $60, with the first payment in 3 years from now (first payment at t=3 and last at t=12).
- 1 payment of $400 in 5 years and 6 months (t=5.5) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?

A share was bought for $10 (at t=0) and paid its annual dividend of $0.50 one year later (at t=1). Just after the dividend was paid, the share price was $11 (at t=1).

What was the total return, capital return and income return? Calculate your answers as effective annual rates. The choices are given in the same order:

##r_\text{total}##, ##r_\text{capital}##, ##r_\text{dividend}##.

Bonds X and Y are issued by the same company. Both bonds yield 10% pa, and they have the same face value ($100), maturity, seniority, and payment frequency.

The only difference is that bond X pays coupons of 6% pa and bond Y pays coupons of 8% pa. Which of the following statements is true?

A trader **sells** one crude oil **futures** contract on the CME expiring in one year with a locked-in futures price of $38.94 per barrel. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before expiry then in one year she will have the:

The standard deviation of monthly changes in the spot price of corn is **50** cents per bushel. The standard deviation of monthly changes in the futures price of corn is **40** cents per bushel. The correlation between the spot price of corn and the futures price of corn is **0.9**.

It is now March. A corn chip manufacturer is committed to buying **250,000** bushels of corn in May. The spot price of corn is **381** cents per bushel and the June futures price is **399** cents per bushel.

The corn chip manufacturer wants to use the June corn futures contracts to hedge his risk. Each futures contract is for the delivery of **5,000** bushels of corn. One bushel is about 127 metric tons.

How many corn futures should the corn chip manufacturer buy to hedge his risk? Round your answer to the nearest whole number of contracts. Remember to tail the hedge.

You deposit money into a bank. Which of the following statements is **NOT** correct? You:

A stock is expected to pay a dividend of $1 in one year. Its future annual dividends are expected to grow by 10% pa. So the first dividend of $1 is in one year, and the year after that the dividend will be $1.1 (=1*(1+0.1)^1), and a year later $1.21 (=1*(1+0.1)^2) and so on forever.

Its required total return is 30% pa. The total required return and growth rate of dividends are given as effective annual rates. The stock is fairly priced.

Calculate the pay back period of buying the stock and holding onto it forever, assuming that the dividends are received as at each time, not smoothly over each year.

**Question 772** interest tax shield, capital structure, leverage

A firm issues debt and uses the funds to buy back equity. Assume that there are no costs of financial distress or transactions costs. Which of the following statements about interest tax shields is **NOT** correct?

**Question 860** idiom, hedging, speculation, arbitrage, market making, insider trading, no explanation

Which class of derivatives market trader is **NOT** principally focused on ‘buying low and selling high’?

**Question 959** negative gearing, leverage, capital structure, interest tax shield, real estate

Last year, two friends Gear and Nogear invested in residential apartments. Each invested $1 million of their own money (their net wealth).

Apartments cost $1,000,000 last year and they earned net rents of $30,000 pa over the last year. Net rents are calculated as rent revenues less the costs of renting such as property maintenance, land tax and council rates. However, interest expense and personal income taxes are not deducted from net rents.

Gear and Nogear funded their purchases in different ways:

- Gear used $
**1,000,000**of her own money and borrowed $**4,000,000**from the bank in the form of an interest-only loan with an interest rate of**5**% pa to buy**5**apartments. - Nogear used $
**1,000,000**of his own money to buy one apartment. He has no mortgage loan on his property.

Both Gear and Nogear also work in high-paying jobs and are subject personal marginal tax rates of **45**%.

Which of the below statements about the past year is **NOT** correct?